MI-12-8 Board of Executive Directors PR-3502-10 For consideration 28 September 2012 Original: English Public Document To: The Executive Directors From: The Secretary Subject: Independent Consultation and Investigation Mechanism. Compliance Review Report of loan 2266/OC-PN “Pando-Monte Lirio Hydroelectric Power Plant Project”. Revised version Inquiries to: Werner Kiene (extension 2541) or Victoria Márquez-Mees (extension 2712) Remarks: This revised version includes the Annex C “Requesters’ Response to the Compliance Review Panel’s Draft Report”. The attached document is being presented in accordance with the provisions governing the operation of the Independent Consultation and Investigation Mechanism (document GN-1830-49). Supersedes: MI-12-7, PR-3502-9(9/12) Reference: GN-1830-49(2/10), PR-3502(11/09), DE-214/09, MI-12, PR-3502-2(5/11), MI-12-1, PR-3502-3(5/11), MI-12-2, PR-3502-4(5/11), MI-12-4, PR-3502-6(9/11), MI-12-5, PR-3502-7(10/11) PUBLIC DOCUMENT OF THE INDEPENDENT CONSULTATION AND INVESTIGATION MECHANISM PN-MICI001-2010 COMPLIANCE REVIEW REPORT “THE PANDO-MONTE LIRIO HYDROELECTRIC POWER PROJECT” (2266/OC-PN) PANAMA This document was prepared by the Compliance Review Panel team conformed by Werner Kiene as Panel Chairperson, Mario Epstein and Gilberto Amaya. The Report is based on information the Compliance Review Panel obtained up to July 29th, 2012 Under the Access to Information Policy, this document is subject to public disclosure. COMPLIANCE REVIEW PHASE TO: Board of Executive Directors of the Inter-American Development Bank CC: Mr. Luis Alberto Moreno - President of the Inter-American Development Bank FROM: Werner Kiene, Compliance Review Panel Chairperson REFERENCE: PN-MICI001-2010, Case “Pando-Monte Lirio Hydroelectric Power Project” PROJECT: Pando-Monte Lirio Hydroelectric Power (2266/OC-PN) COUNTRY: Panama DATE: August 27th, 2012 I am pleased to submit the Panel’s Report on the Compliance Review of the “Pando-Monte Lirio Hydroelectric Power Project” based on information the Panel obtained up to July 29th, 2012. The Panel is prepared to meet with you for a follow-up discussion of our Final Report as per Section 69 of the ICIM Policy and to learn about your final decisions regarding any actions that may be deemed appropriate or necessary in light of our findings, as well as any action plan resulting from such decisions. As per Section 72 of the ICIM policy, the Panel stands ready to be engaged in the monitoring of any remedial or correctional actions agreed upon as a result of this Compliance Review. With our kind regards, Werner Kiene 4 TABLE OF CONTENTS About the Compliance Review Panel……………………………………………………..…7 Acknowledgements………………………………………………………………………..…8 Acronyms and Terms..…………………………………………………………………….....9 Executive Summary………………………………………………………………………….109 Part A: Background, Findings, Recommendations ............................................................... 12 Chapter 1: The Request and the Compliance Review ............................................... 12 Chapter 2: ICIM’s Involvement and the Compliance Review Process ..................... 14 2.1 The Consultation Phase ............................................................................ 14 2.2 The Compliance Review Process ............................................................. 15 Chapter 3: Compliance Review Findings .................................................................. 18 3.1 Key Compliance Issues: Ecological Flow and Cumulative Impact ......... 19 3.2 Requester Concerns Linked to Design Flaws of “Watershed Management” and “Ecological Flow” ..................................................... 22 3.3 Requester Concerns Arising from the Implementation of the Project ...................................................................................................... 25 3.4 Requester´s Concerns not subjected to a Detailed Compliance Review ..................................................................................................... 27 Chapter 4: Recommendations to the IDB Board of Executive Directors .................. 27 4.1 Recommendations for the Pando-Monte Lirio Project ............................ 27 4.2 Recommendations for a More Systemic Approach to the Bank’s Private Sector Engagement ...................................................................... 28 4.3 Follow-up and Monitoring ……………………………………………...29 Part B: Project Details, Stakeholders and Decision Making ................................................ 29 Chapter 5: Details about the Project .......................................................................... 29 5.1 The Chiriquí Viejo Watershed ................................................................. 29 5.2 The two Hydropower Dams and Their Associated Structures ................. 30 5.3 The Key Project Stakeholders Contacted by the Panel ............................ 34 Chapter 6: IDB’s Decision making for Board Approval ........................................... 38 6.1 IDB in the Early Stages of Project Preparation ........................................ 38 6.2 The Loan and the First Disbursement Process ......................................... 39 Institutions Contacted During the Field Mission ................................................................... 42 Bibliography .......................................................................................................................... 43 5 Annexes Annex A Description and Analysis of the Requesters’ Concerns ………………………….44 Annex B IDB Management’s Response to the Compliance Review Panel’s Draft Report ……………………………………………………………………………………………….65 Annex C Requesters’ Response to the Compliance Review Panel’s Draft Report ……….. 78 6 ABOUT THE COMPLIANCE REVIEW PANEL The Compliance Review Panel is part of the Independent Consultation and Investigation Mechanism (ICIM) of the Inter-American Development Bank (IDB). A Panel Chairperson and four Panel Members were appointed by the Board of Executive Directors of the IDB. The Panel took up its functions in October 2010. The Chairperson and the Panel Members exercise their duties in an independent manner. They are not entitled to work for the IDB for a period of five years after their terms expire. The role of the Panel is to carry out independent investigations of complaints by Requesters who assert that their rights or interests have been or could be expected to be directly, materially adversely affected by the failure of the IDB to follow its operational policies. All requests addressed to the ICIM are routinely first processed through the Mechanism’s Consultation Phase led by the ICIM’s Project Ombudsperson. Requests proceed from the Consultation Phase to consideration under the Compliance Review Phase if the Requesters express a desire for a Compliance Review, and if the Consultation Phase has been terminated or concluded for any reason or when the Request was deemed ineligible under the Consultation Phase. Detailed information on the ICIM is available at www.iadb.org/icim 7 ACKNOWLEDGEMENTS The preparation of this report benefited from the support and valuable contributions of many individuals who provided information and shared their experience. The Panel wishes to thank the Requesters for their considerable insights into the complexities of this Project, and to the staff in charge of the Project in Panama City and in the construction site for providing important information about the design and implementation of this operation. The Panel also wishes to express its appreciation to government officials in Panama City, in the city of David, and in the Project region for providing valuable views, information, and analysis. The Panel is also grateful to the IDB’s Country Office in Panama for assisting with logistical arrangements, providing transportation, and for its support in identifying contacts and documents. Finally the Panel wishes to express its gratitude to the IDB staff in Washington, D.C. for their assistance in providing background information and documentation, and to the ICIM Executive Secretariat. 8 ACRONYMS AND TERMS ANAM Autoridad Nacional del Ambiente (National Environmental Authority) ASEP Autoridad Nacional de los Servicios Públicos (National Authority for Public Services) BOARD IDB Board of Executive Directors CAO Compliance Advisor/Ombudsman CVR Chiriquí Viejo River DEG Deutsche Investitions-und Entwicklungsgesellschaft EHS Environment, Health and Safety EIA Environmental Impact Assessment EIS Environmental and Social Impact Studies EISA Electron Investment S.A. EMP Environmental Management Plan EPC Engineering, Procurement and Construction ERM Environmental Resources Management ESAP Environmental and Social Action Plan ESG Environmental and Social Safeguards Unit ESMP Environmental and Social Management Plan ESMR Environmental and Social Management Report ESR Environment and Social Review GoP Government of Panama ICIM Independent Consultation and Investigation Mechanism IDB Inter-American Development Bank IFC International Finance Corporation NGO Non-Governmental Organization SIEPAC Sistema de Interconexión Eléctrica de los Países de América Central (Interconnection System of the Central American Countries) The Project Pando-Monte Lirio Hydroelectric Power Project URS URS Corporation 9 EXECUTIVE SUMMARY i. The “Pando-Monte Lirio Hydroelectric Power Project” reflects the Bank’s commitment to investments in “clean energy” in Central America. Funding for this Project goes to the construction of two hydroelectric dams and associated structures. The